FHA Mortgages On Verge of Being More Expensive and Tougher to Get

FHA Mortgages On Verge of Being More Expensive and Tougher to Get

FHA may tighten homebuyer requirements with plans to Raise Credit Score Standards, Reduce Seller Concessions, Increase MI Premiums and Increase Down Payment Requirements in reports by the Washington Post and Mortgage News Daily (12/2/09).

Many new home buyers who could not come up with a big down payment have looked to the Federal Housing Administration as a premier financing resource. FHA now provides almost 30 percent of all home purchase loans. Now, these attractive FHA-insured mortgages are on the verge of becoming more expensive and tougher to obtain. 

Housing and Urban Development Secretary Shaun Donovan told the House Committee on Financial Services that FHA is studying new policies to improve the quality of its current portfolio and mitigate future losses. Here's a summary of some of the possible changes:

• Higher Credit Standards. The minimum borrower Credit Score will be raised.  FHA has tended to consider extenuating circumstances contributing to credit "glitches." FHA does not have a minimum credit score. However, it does allow lenders to set their own minimum FICO score. Already, we see lenders impose a minimum 620 credit score with rate premiums for less than a 660 credit score.

• Cutting Seller "Concessions" to Lower Borrowers' Closing Costs. FHA says it plans to reduce the maximum permissible seller concession to 3 percent. Critics say FHA current policy that allows the seller to contribute "up to 6% of the home sales price toward closing costs and pre-paid items." is too generous.

• Bigger Down Payments. The up-front cash that a borrower will be required to bring to the table will be increased to make sure that borrowers have "skin in the game." The minimum cash down payment requirement for 30-year fixed rate FHA insured mortgage loan is just 3.5%. On a $150,000 house, the buyer has to bring only $5,250 to the closing table, plus closing costs which can be paid by the seller. No determination has been made by FHA yet on the amount of future down payments.

 • Higher Mortgage Insurance Premiums. FHA will ask Congress to pass legislation to increase Mortgage Insurance premiums as a means of raising capital for the reserve fund. FHA now charges an upfront mortgage insurance premium (UFMIP) of 1.75 % of the loan amount. Typically, borrowers add that to the loan amount and finance it over the term of the mortgage. FHA also charges an annual Mortgage Insurance (MI) premium of up to 0.55 percent of the loan amount which is paid by the borrower as part of their monthly payment.  FHA could raise the upfront premium as high as 2.5%. It could also raise the annual fee too, Either one or both would mean higher monthly payments for the buyer.

Summary: The horse isout of the barn! FHA appears to be losing sight of its mission - "to increase homeownership, support community development and increase access to affordable housing" by providing access to affordable financing alternatives. These proposed changes only require administrative decisions on the part of FHA. Industry professionals will have little opportunity to voice any objection. Any or all of these changes will severely diminish the enthusiasm generated by the First Home Buyer and Move-Up/Repeat Tax Credits. They will certainly put damper on any sales momentum that might have carried forward into the peak springbuying season.                                                                                    He who hesitates is lost! Anyone considering buying a new home is well advised to move quickly before the rules of the game are changed once again.